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—— Forwarded Message From: Shiuman Ho Date: Wed, 10 Apr 2002 22:15:49 -0700 Subject: Good article on Price Cap hearing, AT&T, and more…

This article summarizes some of the possible outcomes of the Price Cap hearing and their impact on the competitive landscape in the Canadian telecom market.

Shiuman

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>From globeandmail.com, Monday, April 1, 2002

Stakes high as telcom rules revised CRTC must balance competing interests PATRICK BRETHOUR

Call it the Lotto-CRTC.

Hundreds of millions of dollars — not to mention the future of local telephone competition in Canada — are at stake as the Canadian Radio-television and Telecommunications Commission unveils the new rule book for the industry later this month.

AT&T Canada Inc., weighed down by deep losses and falling credit ratings, says “sustainable competition” is at risk. Call-Net Enterprises Inc. is more blunt, saying that without major regulatory changes, it and other new entrants won’t last the decade it will take to start turning a profit.

“The financial markets aren’t going to let us hang around that long,” says Jean Brazeau, senior vice-president of regulatory and government affairs at Call-Net, which operates under the Sprint Canada brand.

In 1998, the federal regulator set up the “price-cap” regime, replacing the previous system that guaranteed the phone companies a return on capital. The price cap was designed to curb the power of incumbent telephone companies — Bell Canada, Telus Corp. and smaller regional players — and thereby spur local competition.

Four years on, full-blooded local competition seems no closer. Smaller new entrants, such as Axxent Inc., tumbled into receivership last year as capital markets dried up, and larger competitors, such as Call-Net, AT&T Canada and GT Group Telecom Inc., have been hamstrung by huge losses.

Consumers should expect their monthly bills to rise, whatever the specifics of the CRTC decision, says Brian Sherwood, senior associate with the Seaboard Group, a Brockville, Ont., telecommunications consultancy. “We’ll end our years of going down.”

The stage is set for a substantial renovation of the structure of competition, but the CRTC will need to strike a balance between four complex issues: the price cap; the spread between the monthly bills of consumers in low-cost urban areas and high-cost areas; the contribution pool that all players pay into to defray the cost of providing service to high-cost areas; and the fees that new entrants pay to use the incumbents’ networks.

Price cap

Two things the telecom industry can agree on are this: The price cap system doesn’t work, and consumers’ monthly bills need to rise.

Under the current system, the savings from the declining cost of an incumbent’s network have to be split with consumers. The effect has been to drive down prices in the residential market.

In the face of falling prices, new entrants, which have higher costs, have been hard pressed to make any substantial foray into the local market.

Incumbents Bell Canada and Telus both want to do away with the “productivity offset” that forces them to reduce prices as their costs fall. Essentially, the two companies are seeking the right to set prices the way an unregulated business does, trading off maximizing profit per customer and overall revenue.

“It would be a business decision, how you share that,” says Robert Farmer, Bell Canada’s vice-president of regulatory matters.

On the other side of the issue, AT&T Canada and Call-Net are seeking to keep the regulatory handcuffs on their bigger competitors. Call-Net wants the productivity offset increased, which would cut into the amount of cash the incumbents get from local services. But the company also proposes that the offset be used to reduce the fees it pays to the incumbents, rather than reducing residential bills.

AT&T Canada, for its part, wants the CRTC to strip the incumbents of the ability to decide in which markets prices fall, arguing that Bell and Telus have pushed down rates in areas where they face competition, while leaving rates untouched in non-competitive regions.

Urban versus rural rates

Currently, the rates in high-cost areas — rural Canada, towns and smaller cities — are roughly on par with those in denser urban areas, even though it is much less expensive to provide service to consumers in large cities.

That parity would end under proposals from Bell and Telus, with rates in high-cost areas moving sharply higher than those in urban areas, where rates would simply keep pace with inflation.

The new entrants are aiming to trim the amount of cash that the incumbents get from high-cost areas, in order to prevent what they see as subsidies flowing to competitive areas from non-competitive ones.

Contribution pool

Last year, the CRTC sharply reduced the pool of money available that all industry players pay into in order to defray the expense of providing local service to high-cost areas. Both Telus and Bell Canada want the contribution pool — slated to be $350-million this year — to be increased, although they say they accept that it will be less than the $1-billion fund of 2000.

A deeper contribution pool is a key aim for Telus, says Jim Peters, executive vice-president of corporate development. If the CRTC doesn’t increase the contribution pool, Telus will be out of pocket around $1-billion, Mr. Peters says — impeding its effort to expand eastward to compete with Bell Canada. “That’s a billion dollars less that Telus will have to expand into Guelph or Gravenhurst.”

Network access fees

For AT&T Canada, the make-or-break element of the CRTC decision will be the amount it and other new entrants have to pay to use the facilities of the incumbents. AT&T Canada said it paid $450-million in such fees last year, the largest part of the $600-million to $700-million the entire industry paid.

The company says it uses the facilities of Bell Canada, Telus and other incumbents for more than half of its traffic — and will continue to depend on those firms for the “foreseeable future,” despite having invested $500-million annually in infrastructure over the past four years.

Chris Peirce, AT&T Canada’s senior vice-president of regulatory and government affairs, says the incumbent firms had nearly a century to construct their infrastructure — and did so under the protective umbrella of a regulated monopoly. “A company like Bell didn’t just decide to build a network across the country.”

AT&T Canada is asking for a 70-per-cent discount (a reduction worth more than $300-million using last year’s payments), a figure it arrived at by estimating how much it would cost to serve its customers if it built its own mid-sized network. Call-Net is asking for a smaller reduction of 40 per cent, basing its calculations on the incremental cost of supplying each service.

Not surprisingly, the two main incumbents, Bell and Telus, strongly oppose reductions. Telus says the “huge discounts” would mean that it would not even cover its costs when supplying services to new entrants. Bell Canada says the discounts are “extreme proposals.” BCE chairman and chief executive officer Jean Monty had a sharper-tongued assessment of the idea last June: “As far as I’m concerned, it’s a bit of sour grapes from a loser who’s crying wolf.”

What might seem surprising is that another new entrant, GT Group Telecom, opposes reductions to network access fees, arguing that any cut will merely drive down already slim profit margins. Not coincidentally, the company depends less on the incumbents to complete its calls; it would be helped by discounts, but its rivals would be helped more.

“We aren’t asking for huge subsidies,” says Fiona Gilfillan, the company’s vice-president of regulatory affairs.

The local competition

The Canadian Radio-television and Telecommunications Commission decision on competition in the local phone market will tackle four main issues

AT&T Canada:

John McLennan, vice-chairman and CEO

Price Cap

Strip ILECs of ability to decide where to reduce prices as costs fall

Rural versus urban rates

Freeze rates for high-cost areas in real terms; for low-cost areas, CRTC should ensure services aren’t priced below cost

Contribution pool

Satisfied with current level, reduced in 2001

Network fees

70% reduction in fees paid to incumbents, with rates to be set at what the cost incumbents incur to supply themselves.

BCE:

Jean Monty, chairman and CEO

Price Cap

ILECs to decide whether to cut prices or boost profits as network costs fall

Rural versus urban rates

Rates in urban areas should rise by rate of inflation; in higher-cost areas, rates could rise by $8 a month over four years to a maximum $29.95 monthly charge

Contribution pool

Reflect current cost of servicing high-cost areas, but keep current formula; effect would be to increase contribution pool

Network fees

Retain a markup for essential and near-essential services in order to contribute to overall fixed and common costs; for other services, reductions only for “avoidable costs” specific to retail market

Call-Net:

William Linton, president and CEO

Price Cap

Increase productivity offset to 6% from 4.5%, reducing cash benefit to incumbents; use offset to reduce network fees rather than retail prices

Rural versus urban rates

Rural and urban rates must rise or fall in tandem

Contribution pool

No position

Network fees

40% reduction in fees paid to incumbents, with rates to be set at the cost of supplying specific service

Group Telecom:

Dan Milliard, CEO

Price Cap

Current system has driven down profit margins “unnecessarily quickly”

Rural versus urban rates

Freeze business rates in real terms; no position on residential rates

Contribution pool

Contributions should be based on “incremental costs” of ILECs, which would tend to shrink pool of cash available

Network fees

Opposes reductions, although would reap savings if AT&T/Call-Net proposal accepted

Telus:

Darren Entwistle, president and CEO

Price Cap

Any productivity improvements in low-cost areas could be kept as profits

Rural versus urban rates

For high-cost areas, prices to rise by up to $3 a month each year over five-year period to a maximum $35 monthly charge. For other areas, market forces to determine prices.

Contribution pool

Contribution should be higher than current $350-million, but lower than the $1-billion in 2001, to better reflect costs of servicing remote areas.

Network fees

Opposes reductions as a distortion of market forces

—— End of Forwarded Message

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